I was talking with a friend who now lives in Manchester, yesterday. She told me that bankc in the UK have been part of the housing market boom (up 14% last year) by financing just about anyone, including giving out mortgages for up to 60 years. I question this. I question this a lot, in fact.
Anyone know the skinny on this?
-Tcat
I know that there’s definately talk of this happening, house prices being crap at the moment (i’m trying to become a first time buyer). In japan, (so I’m told!?) they have 100 year mortgages, where the descendents take it on. Madness.
The Halifax offer up to a 40 year mortgage repayment time, so it is probably not out of the question some smaller lending organisation will offer a 60 year repayment plan.
I’ve not heard of it though, or why anyone would want it either. Not much help.
This link has a little on it…
I’ve not heard of it, but perhaps the theory is that, with inflation and increases in earnings, the borrower will be able to shorten the term as time passes by increasing the repayments.
I haven’t heard of this either. However, there is very great concern developing around the issue of the level of personal debt in the UK:
Government can’t develop policy that might increase interest rates as, in the prevailing circumstances, they’re worried about a Japanese style negative inflation scenario and house price value collapsing: negative equity, debt defaulting, etc (NB Japan’s 10+ year recession) vs. letting things carry on slowly spiralling out of control. Very ugly and largely unreported problems…
The UK economy looks good but we’re about to face some extremely choppy waters in the opinion of many experts: Question is; what can Brown/Blair conjure up to avoid the Japan scenario ?
The big worry on such long term mortgages is that the debt to personal income ratio is very high indeed.
I have heard of figures of over five times personal income, but this was in the case of a student nurse whose income is certain to rise by several times. This is only one instance and the term was the usual 25 year one, but in theory 40 year mortgages should allow a lower rate of interest, and so higher borrowing.
It can make a good deal of sense in the current market, where plans to substantially increase the housing stock are not forseeable in the next decade.
It is likely that rents will increase as property values rise, and getting a rate of say 3 to 4% will soon end up costing less to service than rent.
The kicker though is what will happen to interest rates, one would expect to arrange a fixed rate for ten years or more, if rates rise significantly this could be disastrous if such a strategy is not adhered to.
My problem with all this is that in the end, no-one winds up any better off since everyone will be forced to the same way of raising money, and house prices will always rise to the amount that people can borrow, if that amount reaches a ceiling then house prices will also stop rising.
If you go back to the 50’s and 60’s there was a tendency to have one major income, and any second income was usually small by comparison and not taekn into account for calculating the amount a potential purchaser could access.
People intead gambled on large wage rises, because of inflation, to offset initially crippling mortgage costs.
As the second income grew the amount a borrower qualified for increased, but this just pushed up house prices even faster than the rate of inflation.The result is that now it takes two good incomes to finance a house purchase, if one income is lost then the remaining income cannot support the debt, which is partly what happened in the 80’s when there were large scale redundancies, and when the finacial pressure is on, then relationships feel the strain, exarcerbating the problem.
If you move the current scenarion on further, it seems to me that families will have to stay under one roof, children will not be able to move out, there will be those who inherit property from family, and those who started off on the council estates will just have that role reinforced, and the stratfication of British society will become ossified.
This is bound to lead to social tensions, in places such as Burnley and Bradford, Asians and other ethnic groups tend to inhabit the less salubrious areas of town, and this does lead to social isolation, and the creation of an underclass.
This is given a racial gloss by those who wish to exploit such things, but the reality is that it is a class issue rather than racial, its just that ethnic minorities find themselve in the lowest income groups.
The Local Rag had an article about million $ homes in the area with infinite term mortgages. That is, all you do is pay interest, never any principal. Supposedly much lower interest rates that way. Note that one can usually at some time in the future throw extra money at the lender to apply to the principal. People think now’s a good time to buy, rates are low, a lot of stagnation (in our area) in pricey homes so it’s a buyer’s market, etc.
And on a related note.
I am not sure why this is madness. Presumably the descendents will gain use of the property. This is still better than renting where the descendents still have to pay for somewhere to live but have no property.
The big problem is when housing prices fall and people have no equity or the loans are underwater.
I’d take a 60-year mortgage, or a 100-year mortage, for that matter, in an instant (well, depending on the rate vis-a-vis 30 year mortgages). In general, longer terms are better than shorter terms, and there’s no point in tying up your cash in the house.
Your house will appreciate at the same rate, regardless of the length of your mortgage. You get 100% of the increase in equity. And so long as you can get a higher rate of return on the funds than the mortgage rate (including taxes on the return and the deduction for mortgage interest), you come out ahead both ways. Shouldn’t be too difficult to find long-term investments that will beat long-term mortgage rates (remember, we’re talking long-term).
Besides, what’s the difference between a 60-year mortgage and a 30-year mortgage which is refinanced every now and again, often with cash taken out? Regardless of whether you’re taking cash out or not, you’re still extending payments for another 30 years from the refinancing date.
Note though that a great many people who refinance a 30-year loan do so on 15-year terms (like I just did…)
So if you never own the property, isn’t that called “renting?”
Renting never transfers ownership of what’s being rented, or leased.
In the case above, the person would own the property, but the lender would have an interest (lien) that would never be released. I’d guess that they would have to pay off the loan before the property could be sold. or the prospective buyer would have to assume the loan.